What You Need to Do to Secure Core IP Before You Export

Due to Australia’s open attitude to free trade (when compared with the US and the UK more recently), Australian businesses that export can have a significant advantage over their locally based competitors. Austrade research indicates that, on average, Australian businesses that export are more profitable, have higher skilled jobs, adapt faster to technology and business techniques, and have better growth potential to survive long term. This is compared to their Australian non-exporting counterparts.

What is less well known is that the maximum gains from international trade and export are not derived from increasing the volume of exports. It is actually the quality of the exports that unlock the long-term economic growth. According to a study published in the International Journal of Development Issues, creating new products and strengthening IP protection has a positive impact on domestic export quality, particularly in high-technology industries.

Australia’s mining boom, manufacturing and media industries are a testament to the fact that Australia’s future economic prosperity relies on our ability to innovate and adjust quickly to disruption. The innovation drive and our unique proximity to and relationships with the Asia-Pacific region present an obvious opportunity for Australian small-to-medium businesses. Whilst our competitors are focused internally, Australia can use this window to export our high quality and innovative products and services into international markets.

This article discusses some of the key IP issues that should be considered by any Australian business before they go offshore. Given the complexities of the different intellectual property regimes across the world, seeking proper advice, and having a robust IP portfolio that offers protection in your target markets, will be critical to your success.

Before You Rush Off to Export, Wait!
Unfortunately, the rush by Australian businesses to innovate and capture this opportunity can land many small-to-medium businesses in trouble when faced with the reality of the international marketplace. One of the major areas of concern is the number of businesses failing to secure their core “innovations” with appropriate IP and contractual protections in the export destination.

The following sobering lesson from a large well-resourced business highlights the real need to obtain advice on proper IP protection, in particular, trade mark registrations, both domestically and internationally. This preparation is an indispensable part of doing business internationally.

Case Study: Treasury Wine Estates – Penfolds
China has overtaken the U.S. as a destination for Australian wine exports in recent years and naturally, businesses have had to respond to this demand. In a product as simple as wine, where packaging is fairly uniform and quality is not necessarily apparent before purchase, the brand is a key distinguishing asset. Yet Melbourne’s Treasury Wine Estates suffered significant losses when they entered the Chinese market without first registering their brand as a trade mark in Chinese characters. China is a “first-to-file” jurisdiction, meaning that, if a competitor files your trade mark before you do, you cannot contest their application merely because you used the trade mark in China first.

Treasury Wine Estates has been exporting Penfolds into China for over 25 years, with Chinese consumers referring to the Penfolds brand as Ben Fu for approximately 20 years. In 2009, a local wine distributor and notorious trademark squatter, Li Daozhi, registered the name Ben Fu almost 12 years after Penfolds’ launch. This same squatter had also successfully registered the Chinese name for French winemaker Castel, sued Castel for trade mark infringement, won $5.8mil in damages, and kept the name, forcing Castel to relaunch a new brand.

Source: Penfolds Wine

A trade mark is a sign used, or intended to be used, to distinguish goods from one person, in course of trade, from those provided by any other person. Whether a trade mark distinguishes your goods or services from those of another, depends on how your trade mark is perceived by consumers. If a consumer recalls a positive experience from your product and associates that positive experience with your brand, they will be more likely to select your brand again.

Considering the purpose of a registered trade mark, being to protect the brand, it is hard to believe that a Western company selling beverages to Chinese consumers would fail to protect the asset that makes consumers associate the product with quality, namely the Ben Fu brand. Not to mention that food product quality laws require Chinese labels.

However, it is not just the failure to understand the human behaviour underpinning this core IP asset, nor the time and legal expense incurred to correct the situation. What makes this case noteworthy is that the lack of foresight and strategy in IP correlated with a broader approach in business for export.

Broader Business Impact
In 2012, Treasury Wine Estates commenced litigation against the squatter, arguing that Li did not have genuine use of the mark in wine or related activities. During the course of the legal battle to reclaim their unprotected famous brand, all Intercontinental Hotels in China withdrew their Penfolds Wines, amounting to 5000 cases annually or 5% of Treasury Wine Estates’ total shipments to China.

Intercontinental did this because they did not wish to become involved in potential litigation or be liable for damages to a squatter, despite Treasury Wines Estates winning the first round of the case. Even a company as large as Treasury Wine Estates with a brand like Penfolds could not maintain the confidence of distributors or retailers during litigation in China.

We note that while China has since improved its IP laws considerably, these changes will have little economic impact until the delays in practice catch up. In a business sense, this means there are still risks for small-to-medium businesses, particularly in some regions. To avoid the types of mistakes made by Treasury Wines in China, we have one practical tip for businesses seeking to take up export opportunities:

If we learned anything from Penfolds, it is that the cost of winning IP legal battles overseas did not make business sense when compared to the low cost of filing the protection for Chinese character marks of their Western brand. These sorts of costs and battles can be avoided by proper planning and by securing IP protection in your export markets.

In watching the Budget, the message is clear that the Government is trying to stimulate Australian innovation, export and trade.

Australia’s economic future should also include business budgeting to secure quality IP and innovative assets before entering a market. This preparation is an essential investment to survive disruption and is not just about protecting yourself and being able to enforce your IP. It is about the commercial reality that your distributor and business partnerships may be irreparably damaged by a lack of business foresight, strategy and frankly, common sense.